The Returns On Capital At Emdoor InformationLTD (SZSE:001314) Don't Inspire Confidence

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Emdoor InformationLTD (SZSE:001314) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Emdoor InformationLTD:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.028 = CN¥56m ÷ (CN¥2.7b - CN¥661m) (Based on the trailing twelve months to September 2023).

Thus, Emdoor InformationLTD has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 6.4%.

See our latest analysis for Emdoor InformationLTD

Historical performance is a great place to start when researching a stock so above you can see the gauge for Emdoor InformationLTD's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Emdoor InformationLTD.

What Does the ROCE Trend For Emdoor InformationLTD Tell Us?

When we looked at the ROCE trend at Emdoor InformationLTD, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.7% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Emdoor InformationLTD has decreased its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Emdoor InformationLTD's ROCE

We're a bit apprehensive about Emdoor InformationLTD because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 8.4% return to shareholders over the last year, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Emdoor InformationLTD does have some risks, we noticed 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.